Incoterms Explained: Cost and Freight (CFR)

The CFR Incoterm or “Cost and Freight” is an Incoterm that is exclusive to ocean freight shipping.

It states that the seller is not only responsible for delivering the goods to the port specified by the buyer, but also bears the transportation costs of the goods to the destination port.

CFR is nearly identical to CIF, the only difference is that insurance is mandatory under CIF and must be provided by the seller. With CFR, however, insurance is optional.

Common practice dictates that CFR should be chosen over CIF if the buyer is able to acquire better or more affordable insurance and vice versa.

What are Incoterms?

Incoterms is the short form for International Commercial Terms. These are terms used by the business community and cargo transport operators in the sale and the subsequent transport of goods by land, sea, or air. 

The Incoterms are updated and published by the International Chamber of Commerce (ICC) once every 10 years. They help make communication between the different parties to trade and transport easy and unambiguous. Incoterms is accepted universally by trading communities, transporters, government bodies, etc. 

The current version that is used is the Incoterms 2020. It has 7 rules that cover all the modes of transport and 4 that are specific to the transport of cargo over water. These Incoterms rules are as follows:

The Incoterms that are specific to water transport are the following:

  • FAS – Free Alongside Ship (port of loading has to be mentioned) 
  • FOB – Free on Board (port of loading to be mentioned) 
  • CFR – Cost and Freight (show port of discharge) 
  • CIF – Cost Insurance and Freight (port of discharge to be shown)

CFR - Cost and Freight

The seller pays for the carriage of the goods up to the named port of destination. Risk transfers to buyer when the goods have been loaded on board the ship in the country of export. The shipper is responsible for origin costs including export clearance and freight costs for carriage to named port. The shipper is not responsible for delivery to the final destination from the port (generally the buyer’s facilities), or for buying insurance. If the buyer does require the seller to obtain insurance, the Incoterm CIF should be considered. Cost of carriage is payable by the seller, the bill of lading usually indicates “freight prepaid.” CFR should only be used for non-containerized sea freight and inland waterway transport; for all other modes of transport it should be replaced with CPT. CFR is also best used in situations where sellers have direct access to the vessel for loading, i.e. bulk cargo or non-containerized goods. For most exports however, Carriage Paid to (CPT) might be a better Incoterms choice. The named destination under CPT can be any freight destination.

What Are the Seller’s Obligations for Under the CFR Incoterm?

Under a contract using the CFR Incoterm, the seller is required to pay for all the costs to get goods from their origin point to a destination port of the buyer’s choosing. That includes expenses related to transporting the shipment to the origin port, clearing any export procedures, getting it loaded on a vessel, and carriage via ocean freight to the destination port. 

What Are the Buyer’s Obligations Under the CFR Incoterm?

Once the shipment arrives at the destination port, the buyer is responsible for any costs going forward. Unloading at the port and carriage to the final destination will both be arranged for and paid by the buyer.

Bottom Line

The CFR rule, like the CIP, CPT and CIF rules, imposes basic costs on the seller. The obligations in this rule are also relatively similar to the obligations of the seller in the FOB rule. There is, however, a fundamental difference between them. In the case of the Incoterms CFR rule, the seller is responsible for transport. It means that the exporter finds the carrier, negotiates the appropriate contract and pays for the transport. In addition, it is recommended to use CPT rule if more than one mode of transport is used.

 

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